CPS Technologies Corp (CPSH) 2022 Q1 法說會逐字稿

Good day. Thank you for standing by, and welcome to CPS Technologies Corporation first quarter investor call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the call over to your speaker, Mr. Griffith. The floor is yours.

Thank you, operator. Good afternoon, everyone, and thank you for joining us. I'm joined by Michael McCormack, our President and Chief Executive Officer, who will offer his comments on our first quarter results.

Before we begin the business portion of the call, I would like to point out that statements in this conference call that are not strictly historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and should be considered as subject to the many uncertainties that exist in CPS' operations and environment. These uncertainties include the impact of COVID-19, the Russian invasion of Ukraine, economic conditions, market demands and competitive factors. Such factors could cause actual results to differ materially from those in any forward-looking statements.

Now I will turn the call over to Michael to offer his perspectives on the first quarter.

Thank you, Chuck. Good afternoon, everyone. Today, we are pleased to announce first quarter revenues of $6.7 million and an operating profit of $547,000 for the quarter ending April 2, 2022. This compares with revenues of $4.9 million and an operating profit of $36,000 for the quarter ended March 27, 2021. We are delighted to report that revenues in the first quarter 2022 were the highest in the company's history and showed 7% improvement over the revenues from the fourth quarter of 2021. Even more significantly, we show a revenue increase of 37% over the first quarter of 2021.

Further, we are beginning to see the benefits of the growth in cost control programs we have put in place as our first quarter operating profit was greater than the operating profit for the entire 2021 fiscal year. We are encouraged to realize returns on the growth initiatives and operational changes we are executing. The team is continuing to drive growth and efficiencies to sustain this momentum.

As the global economy progresses out of pandemic recovery and into new challenges, there are lasting impacts such as inflation, material availability, logistical delays and contracting labor force that we are actively working to mitigate. In an uncertain overall economic environment, we remain incredibly pleased with our first quarter performance and are confident in our outlook.

I'll speak more later about the overall business progress moving forward in the call, but for now, I'd like Chuck to discuss the financial results in a little bit more detail.

Thank you, Michael. Revenues totaled $6.7 million in the first quarter of 2022 compared with $4.9 million generated in Q1 of 2021, an increase of 37%. This increase was due primarily to the increase in sales for armor and hermetic packages in Q1 2022 as well as the impact of the COVID-19 pandemic on our sales in Q1 2021.

Gross margin in Q1 2022 totaled $2 million or 30% of sales. This compares with gross margin in Q1 2021 of $900,000 at 19% of sales. This increase in margin dollars directly correlates to the increased revenue due to the increased absorption of fixed costs and also to improved manufacturing efficiencies.

Selling, general and administrative expenses totaled $1.4 million in Q1 2022 compared with SG&A expenses of $908,000 in Q1 2021. Compensation costs made up a little over half of this increase, in particular increased accruals for variable compensation due to the better results in Q1 2022 as compared to Q1 2021, share-based compensation being postponed to Q2 in 2021 but done as usual in Q1 of 2022, and 3 additional members of our sales team that were hired subsequent to Q1 2021. Basically, those 3 things made up the compensation differential. The other significant portion of the SG&A increase was due to commission expenses incurred as a result of the increase in sales.

The company experienced operating income of $547,000 in Q1 2022 compared with operating income of $36,000 in Q1 2021. This increase in operating income is due primarily to the increase in revenue and gross margin, as previously discussed.

Turning to the balance sheet. We ended the quarter with $4.7 million of cash. This is a reduction in our cash position of $350,000 from the end of 2021. The decrease in cash was due primarily to the increase in inventory and reductions in accrued expenses and that was -- those were somewhat offset by our net profit. Although it remains open and available to us, no additional cash was raised under the ATM program in Q1 2022.

Accounts receivable at April 2, 2022, totaled $4.9 million, the same as the $4.9 million at December 25, 2021. Our days sales outstanding did improve to 66 days at the end of this quarter compared to 72 days at the end of the year ending 2021. The decrease in DSO was due to the inclusion of deferred revenue of $0.6 million in the year-end accounts receivable balance, which was collected during the first quarter of 2022.

Inventories totaled $4.7 million at April 2, 2022, compared to $3.9 million at December 25, 2021. This increase in inventory is due to increased work in process and raw materials needed to support our expected sales growth. The inventory turnover in the 4 most recent -- or in the most recent 4 quarters was 4.7x, which is the same as it was at the end of 2021.

Turning to the liability side, payables and accruals totaled $3.0 million at April 2, 2022, down from $3.2 million at December 25, 2021. The small change is due to payments in Q1 of certain year-end accruals.

And for further discussion, I would like to turn the call back over to Michael.

Thank you, Chuck. This past quarter, we are continuing to make encouraging progress on the plans to translate our value creation through product development into definitive positive financial results that can be appreciated by the wide array of investors in CPS today and tomorrow. As Chuck had mentioned, we are quite encouraged to see the improvement in gross margin. I would like to particularly highlight the work by Dan Barton, our Head of Operations, and his entire team on the implementation of a continuous improvement program with sustainable, substantial, enduring improvements across every product line.

We remain steadfast, focused on increasing our ability to provide products to our customers at a reasonable cost. We believe creating positive financial results quarter-over-quarter and year-over-year will continue to make CPS an attractive investment opportunity to a diverse array of investors, short-term, institutional, index fees or even sophisticated investors that appreciate both our near- and long-term benefits of our unique value proposition.

We also acknowledge that one quarter does not make a year. However, our growing consistency of profitable performance has been a focus of mine since becoming the CEO. There are lots of opportunities for CPS to provide solutions to customers in the electrical vehicle market. The movement from silicon semiconductors to silicon carbide wide-band-gap semiconductors that operate at higher junction temperatures will necessitate the need for thermal management, high heat dissipation and controlled expansion that we continue -- that we can provide with our metal matrix composite, AlSiC. CPS is serving this fixed WBG need today with our customers with a new power module format.

In addition, we see continued growth in implementation of this format with the AlSiC metal matrix composite for the fixed WBG applications as these solutions are better suited to efficient power conversion and offer improved power design flexibility. We have several design wins with our partners/customers that are still in the initial stages of product testing and maturity, and we are collaborating with them to ensure we have a robust plan to meet their future production, high-volume demand over their anticipated life cycle.

There are also many opportunities within the United States Department of Defense strategic objectives to move to hybridization and electric vehicles for tactical and combat fleets. CPS recently attended the Michigan Defense Exposition, where this was a big topic. As you're aware, the Army ground vehicle expertise is specifically located in Michigan and one of several reasons we created a presence in Detroit metro area and added Anthony Koski, who's located there to the CPS staff as our Corporate Development Officer.

A way out still but our past success in the luxury end of the EV market has a lot of synergies with the defense market, and I'd like to highlight the link between military platform electrification and the importance of size, weight, power and cost, SWaP-C, and how this aligns directly to CPS' core competencies and value proposition of reduced weight, superior properties and high reliability that directly contributes to the military's goals of high operational availability. In addition, many of our known competitors are prohibited from supplying key defense technologies into the United States due to existing national security regulations and laws. We view accelerated acceptance of electric vehicles worldwide, the advancement of large U.S. Department of Defense modernization programs as evidenced by the most recent significant funding addition for the proposed R&D budget, and the increased emphasis on modernizing U.S. transportation and energy infrastructure as a potential catalyst for future growth.

Beyond fiscal year '22, we remain cautiously optimistic that our collective growth initiatives, specifically in longer-term new product development investments, will expand the current product lines both in terms of revenues and earnings. As I mentioned previously, we have reengaged with the Small Business Innovation Research, SBIR, and Small Business Technology Transfer, STTR, programs, having made several submissions, and we'll continue to do so. We have recently won 2 SBIRs within the Department of Defense.

The recent Navy award, like the initial award with the Army, is calling for novel solutions to thermal management electronics in the military that could also be commercialized. Our proposed solution is for an aluminum alloy matrix reinforcement nickel titanium for thermal energy storage devices. We are extremely excited that the Department of Defense thinks of CPS as a thought leader in thermal management, and more importantly, they have confidence that we can convert theory into products that can be -- enable the safety and security of our defense forces. We also have several proposal solutions in with the Department of Energy that we expect feedback by the end of the second quarter.

Lastly, we continue to make measured investments to increase the capacity of our current high-volume manufacturing. We are working on a variety of additive manufacturing technologies. Additive manufacturing processes continue to mature, and we're looking at implementing 3D printing processes throughout all of our product lines. Modern processing techniques will allow for the possibility of improved performance and manufacturability. These improvements can range from flashy new material development to things not necessarily seen in the public eye that have quality, increased efficiency. There's still quite a bit of research and development that's little R and big D to refine our ceramic powder combinations with binder material to consistently replicate our current and future MMC formulation, but we are making progress that are encouraging and will result in even greater production yields moving forward.

All investors and listeners today should know that it's worth repeating that creating shareholder value is the focus of mine, the Board of Directors and the entire CPS team. We have had several internal metrics and ways which to measure the business beyond profit and cash flow. I find the best metric of results consistent with our overall growth strategy is the measurement of book-to-bill over a rolling 12 months. This is the first statistic I look at every day. For a business to drive, it needs to book as much business as it delivers, whether it be daily, weekly, monthly, quarterly, yearly. This would be a book-to-bill ratio of 1:1 to remain even. That is not our goal here at CPS. We are in growth mode.

Since I transitioned to leadership here at CPS, we are averaging in the 1.4 to 1.6 book-to-bill ratio over the trailing 12 months basis. This is the result of a lot of arduous work and perseverance by sales, operations, finance, heck, all of us. Specifically though, our Vice President of Sales, Cheryl Oliveira, and her entire team, Gregg Weatherman, Tim Davis, Judy Levitre, Kevin Langley as well as Jim Sorensen and our latest staff addition, Anthony Koski, all enabled by our engineers working in the product development, Dr. Steve Kachur, Dr. Mark Occhionero and Bill Holmes.

In closing my remarks this afternoon, we are extremely pleased with our most recent quarterly performance. We still have lots to do. We're not satisfied with our initial results and look for even larger actionable opportunities to build the business and even increase the assurances that the current growth and profitability trend will be improved upon even further.

And that concludes my opening remarks. Risa, I believe Chuck and I are available if there are any questions from folks on the line.

(Operator Instructions) Your first question comes from the line of [Irwin Gomberg].

Congratulations on a record quarter. It's nice to see the company growing again. I have a few questions. On July 26, 2018, CPS announced it was working with Rafael Defense Systems to provide hybrid armor for some of their vehicles. On April 20, 2022, they announced to the defense market its new models. Is CPS providing some armor for some of these vehicles?

This is Michael. Thank you for the kind compliments for the business. As of May, we are continuing to work with Rafael. I do not know the specific application you're talking about, but we have been working, in my entire 16 months here and prior, with Rafael in a variety of programs, testing various armor solutions. We continue to provide representative target solutions, and we continue to shoot them and have very positive results.

I can't answer the -- what's going on at the Rafael end, but we have a very good relationship with them. And regrettably, they're on holiday this week. But we were talking to them last week. We have quite a good relationship with them. We also have a joint venture with the Southwest Research Institute down in Texas, where we are doing some advanced modeling on armor solutions. So yes, we are still working with Rafael. Yes, they're a great partner. And yes, we continue to make progress, but I cannot specifically address the application where.

They show on their website the vehicles with tiles all over for protection. So obviously, they're looking into the technology, whether they're going to use your solutions because obviously...

Yes, obviously, ceramic armor has been quite the -- it's not new, right? But the advances over the last 20 years of U.S. combat has shown that the lightweight performance, the hardness of ceramic provides lots of survivability features. Certainly, the body armor initiative here in the U.S. has saved hundreds if not thousands of lives. And so I think putting that to scale, whether it be ground vehicles or in our case today, we provide scale for Navy platforms. You can see there are some value to that, the weight savings versus a metallic monolithic solution.

All right. Could you comment on any other hybrid-armor-type contracts you might -- you're looking forward to?

Yes. Well, certainly, we're -- we haven't been awarded, them. Let me just tell you that first. But we are working with partners here in the U.S. And I mentioned Rafael. We do have agents in the EU. Obviously, the European Union has become more sensitive to their armor needs with the invasion of Ukraine, and they have begun to invest more deeply into armor and what it could do and add to their survivability platform. So we have those dialogues going on. Here in the States, we have been focusing on solutions in next-generation platforms that are in the Defense Department budget so that we have accurate and predictable revenues and forecast. So that's been our focus. It varies. I can share with you it varies from helicopter to ground vehicles. So the application of our HybridTech Armor has many, and we are continuing to research to find solutions that will fit within our customers' cost profile and ballistic profile.

Great. And then last question. Wolfspeed announced last week that they have a 1,200-volt module on one car that they're going to start marketing, and they have a picture of the module. It didn't look like there was any copper in there. I mean 1,200 volts obviously. I mean the heat dissipation sort of fits with what you're trying to do. Can you make any comments about that?

Yes. I don't know what specifically you're talking about, but we were encouraged that as we go up in the -- in high -- 1,200 volts, you said, the 1,200-volt module?

Right.

Yes. Obviously, the benefits of our metal matrix composites become even more pronounced. So I think that to your point, we expect to exceed the properties that you can get with the copper solution.

Are there other solutions for a 1,200-volt module besides yours?

I don't know. But do you? I don't...

I'm not that -- I think at 1,200 volts, I think we're kind of in that gray area where if you want to be more efficient, you can use our solution. If you want to try to get away with a cheaper solution, you can. I believe that is correct.

Yes. I'll get with the 2 docs tomorrow and see if we can post something and tell you something or more about that.

Yes. That's a better idea.

Great. And Wolfspeed has talked about car companies moving up. They have 400 and 800 volts, and they said 800 volts is becoming more popular in their future. At that voltage, would AlSiC be used? Or they can get away with...

Absolutely. I mean we don't know the full details of an application for some of our customers, but we are talking in those ranges with them though.

I see. But that's, what, '24, '25, you think before it really becomes a...

Time frame, are you talking years, calendar year?

Yes, years, right.

Yes. To me, it's hard to put a number on it, right? I mentioned in my earlier remarks that the process by which people go through to validate a product solution and test it, it varies from company to company. But it's certainly -- we're in the material matrix, material science business. And we know it's a long cycle to deliver, but then you get to stay for a long time. So I would be -- it would be difficult for me to say, but I think you're on those lines. It's 3 to 5 years out.

Right. And I mean you're obviously studying this market, you know the market. Is there any possibility you can make a module? I mean not AlSiC but something better than copper but not as good as AlSiC to try and get...

Yes. We always work on different combinations of metals and ceramics. AlSiC -- one of the reasons we are very proud of our accomplishments with the AlSiC-9 and 12, but we're not just AlSiC, right? We do all combinations of metal matrix composites. And we're open to all kinds of solutions. And I know Dr. Mark and Dr. Steve are working on those all the time. And I think to my remarks earlier, we won a new contract using aluminum, nickel, titanium. So we're not just AlSiC anymore. So...

I see, which is smart, I think. As long as you're in the metal business, why not provide what the market is looking for in a better way. So congratulations. I think you've done a wonderful job. The company has done fine since you've come aboard, and obviously, I'm sure that's part of your reason that that's happened.

Thank you.

Your next question comes from the line of [Patrick White].

Congratulations on a solid quarter there, both Mike and Chuck, excellent work and particularly on the gross margins. And following up on that little bit. With the book to DSO running at 1.2, 1.4 or higher, is it conceivable that you'd be able to maintain this kind of gross margins going forward? Or is that just a function of the hybrid armor that's being delivered now in '22 and maybe it's going to be tough to keep those margins at that kind of level?

Well, certainly, that's our goal, right? Our goal is to keep the margins up. We're working actively, [Patrick], with a variety of things. Chuck alluded to some of the fixed costs with the higher volume help us. But in total, we have many initiatives being run through operations, whether it be sales, whether it be the purchasing department. We're managing a lot of variables there, and we're just doing hard work with it. And it's not easy, and it's very much complementary to our staff that they have been able to reduce our cost. And we think we're on to something. But like I alluded to, Patrick , one quarter doesn't make a year, right? We need a couple more quarters of this before I'll say that we've made it. But we are trending positively.

Okay. On the EVs, you mentioned maybe several design wins working through those right now at testing and getting those to maturity. Are those wins going to be strictly limited to individual, luxury-type vehicles? Or are you working on something that might be more platform-driven, too, that extend beyond certain limited vehicles?

Yes. Certainly more of the latter, right? And so when we talk to our customers, they are talking some extremely high numbers in high production and we're like, great, when, right, to the earlier calls. And so we continue to have dialogue with them about being realistic on the demands, but there are really high volumes of parts being asked to be quoted and us to demonstrate the production capacity to [answer that].

Okay. Would that require a capital raise to handle...

I don't know at this time, right? Right now, we obviously continue to do like planning. We look at different ways to optimize our factory here. We're in a 40,000-square-foot facility, a site. We have ability to expand here. And it's always difficult when you get into facilities and expansion. Do you get the contract for us and expand for us? And that's kind of the dialogue that we've been working through these days with them. It's what's best to keep costs low, keep us competitive and keep the orders flowing to CPS. So maybe is the question -- is the answer.

That would be a good problem to have, would it not?

Yes. That's the way we call it. We call it a [high rent] problem here, too.

Okay. Can you add any color? I think one of the small business awards, you mentioned aluminum alloy in the commentary and storage devices. Of course, the storage market is exploding from a commercial standpoint. This is military. Can you elaborate upon the application and whether it has broader market application for just commercial storage?

Yes. Well, certainly, we don't know the application yet with the Navy on what they're going to do with it. They very much compartmentalize when they're pursuing technologies. We kind of look generally what part of the Navy it's in, but we don't know specifically what they're going to do with it yet. And I think that's part of the program. As we execute Phase 1, which is a nice program, I think in total, it's $250,000 over the course of 10 to 12 months for contract research and development. There are different phases that -- and gates, performance gates that we have to meet to continue to advance the program. And I think during this Phase 1, we get more information about applications that will lend us towards the Phase 2 and further development.

Okay, work in progress. I have one last question. I have a cold today so I'm struggling. You mentioned improvements in the manufacturing processes in 3D printing. Can you elaborate upon whether exploring 3D printing might enable your outfit costs down to a point where they become extremely attractive in the power module space?

Yes. Well, certainly, I dream of AlSiC being less than copper every day, right? But that's -- we're not there yet. And the idea of reducing our production cost, improving our manufacturing consistency and enabling our salespeople to make the value proposition to clients is always a good approach, right? And so the idea of lowering our cost to remain competitive, whether that be with additive manufacturing, improved current processes -- and they're not mutually exclusive, right? And so we continue to look at all of those parts of the processes. But in the end, our goal is to produce quality products at the lowest cost so our customers can be competitive in the market. So we're open.

(Operator Instructions) Your next question comes from the line of [Kenneth Pound].

Yes, a good quarter, a lot of talking about the military. Is there any updates on what's going on in the EV market? Also, I know you guys do business with trains and other things with this [technology].

Yes. Well, [a main story] about the EV market in both commercial and defense, the train -- or the transportation segment of the market continues to lag from the COVID hangover, if you will. We have been in contact with our customers, and they are forecasting increasing demand, but that's in '23. So I still think that's a lagging segment of the market, but the business is still there for us. We're still executing. We're doing a good job, and we have continued communication with these folks. So yes, I think it's going to be growing. And the EV market could be really huge, right? And I don't want to oversell that, but we've been working on that here for a long time. We've had design wins. We're continuing to get advanced -- we advance from design win to a couple of hundred, to a couple of thousand as they go through all their testing pieces.

Pieces, not dollars.

Not dollars, pieces. And that continues to advance. So it's a long cycle to get our solutions approved and in line, but we're in that in many different phases. Some are at tens. Some are at hundreds. Some are in thousands. So I like the way they could be [feathering] in to us, but we just need to keep pursuing improvements and delivering. And hopefully, good things will happen for CPS.

You mentioned locating someone in Michigan for good reasons. A lot of the EV stuff, at least in the passenger stuff that's going on in California, is there an idea to have some more presence there to go to shows or other kinds of things that they're doing out here out West?

Yes. Well, certainly, we have a gentleman stationed in California already. So we would -- we already have Gregg Weatherman stationed in California. I think he's at the show this week.

At Space Tech event.

Long Beach...

Next week, I guess.

I think it's this week or next week, but we already had Gregg in California. And we also have Tim down in Florida. So he's kind of got the space coast. And then we thought that positioning Anthony geographically in the Michigan area would kind of give us a nice kind of triangle of where we want to be executing commerce. So...

There are no further questions at this time. Please continue.

Okay. Well, if we have no further -- Chuck, I did most of the talking. Do you want to take us home?

I'll -- yes, I'll just say thank you, everybody, for joining us. And hopefully, we'll have equally or better good news in 90 days or so. Thank you.

Thank you, everybody. Thank you, Risa.

This concludes today's conference call. Thank you. You may now disconnect.